Date: Apr 6, 2018 Source: The Daily Star What the Lebanese must do to deliver CEDRE’s promise Stefan Dercon In recent years I have had the privilege of visiting, reading about and thinking about Lebanon. Two stories often recur: the story of Lebanese resilience to crises, and the story of Lebanese vulnerability to crises. I see some truth in both. Indeed, they often seem to be two sides of the very same coin. In CEDRE, I see the possible beginning of a third story – but Lebanon’s leaders will need to demonstrate courage and stamina if it is to deliver on its ambition, to the benefit of all the communities which call Lebanon home. Resilience and vulnerabilityFirst, a pre-Syria-crisis story of resilience. The Central Bank, through the legendary exchange rate peg, gives confidence to diaspora investors, who in turn send their hard earned dollars back, investing in homes in which to holiday and perhaps retire. Real estate prices rise in response, making investment even more attractive, driving the cycle harder. But turn this coin over and we reveal a story of vulnerability, which lies in what is, or isn’t, done inside all those new buildings. Real estate has, ultimately, to be a means to an end, not an end in itself. A banking system which is channeling overseas cash into local housing often just drives up prices and rents for those who actually want to use those buildings to live and work. And, by focusing on profitable real-estate loans, the banks allocate less of their resources to finance the expansion of productive businesses in other sectors. Meaning, perhaps, that so many of Lebanon’s bright graduates find few opportunities here, and so emigrate, earn and remit, driving the cycle yet harder. Moving to more recent years. The Central Bank has done a fantastic job at supporting the Lebanese economy through the Syrian crisis. In simple terms: using its assets to subsidize the rate which depositors can earn on their deposits. Which has kept the diaspora cash flowing in, despite real estate wobbles, despite the shadows cast by the terrible conflicts over the border. Allowing Lebanon to keep paying its import bills and keep financing the government’s debt. Adding yet more weight to that Lebanese story of resilience in the face of hardship. But, with or without a magician at the helm, no central bank can do this forever. The other side of this coin, the vulnerability. Eventually, the high returns paid as reward to those moving their money into Lebanon must be backed up by the value that is created here, by Lebanese businesses and Lebanese citizens. Borrowing – whether by households or by governments – must be repaid through future earnings, which is hard work at the best of times – but particularly hard if we consume, rather than invest, the money we borrow. A third story for Lebanon?And this is where CEDRE strikes me as interesting, as it could be the beginning of a third story. One which is neither about resilience to crisis, nor vulnerability, but about something else: steady, sustainable improvement. If CEDRE is to be a success for Lebanon, it must mark the start of a process which, over time, grows a new inward flow of international capital. But one which, rather than being channeled into unproductive real estate, or consumed by government debt and imports, is invested in building enduring infrastructure which will pay for itself many times over in the years ahead. In roads, electricity, water, waste water, health, education. Creating many jobs during construction. And, once completed, reducing the costs that Lebanese people face, while improving the services they receive. In turn, allowing both businesses and individuals to be more productive. That is the single most promising engine to deliver a species of economic growth which can be enjoyed by all of Lebanon’s citizens and communities. This could be a promising path for Lebanon – allowing, perhaps, the best of both worlds – to keep the currency peg and the confidence this brings, while also reducing costs and increasing the competitiveness of Lebanese businesses and Lebanese exports. No crisis, no sudden and painful adjustment, just steady, sustainable improvement. The slow, brave path to successBut for this third story to come true, it will require political courage, stamina, and perhaps most of all cooperation, from Lebanon’s diverse political and confessional leaders. While the international community can help meet the costs, the benefits for Lebanon’s citizens and Lebanon’s future prosperity will only be unlocked if Lebanon’s current and future governments live up to the promises that I hope will be made at CEDRE – to reform the electricity sector, bring government borrowing under control, and improve the civil service’s technical capabilities to deliver the projects. But most of all, for this story to come true, Lebanese leaders will need to find the cross-party political will to make sure that these projects get delivered, on time and on budget, rather than getting blocked. So that the benefits are felt by the many ordinary Lebanese citizens and businesses, not stolen or diverted by the few. Which is why I hope that at CEDRE Lebanon’s government commits to a concrete plan and timetable for delivering the crucial reforms needed for these investments to be a success. And I hope Lebanon’s leaders advertise how seriously they take this, by committing to a robust and transparent follow-up mechanism. This would allow Lebanese civil society to track progress, and allow this, and future governments and donors to publically celebrate success, and confront challenges, as they arise. And in so doing, build the confidence that could unlock increasing flows of productive international private sector investment in Lebanon’s creaking infrastructure in the months and years ahead. The road is hard and the hurdles are very high, but the rewards for Lebanese citizens, and for the next generation, are huge. It feels like it might be time for Lebanon’s leaders to show that they are ready to start a new, brave and – in some ways – more boring chapter in Lebanon’s history. Stefan Dercon is professor of Economic Policy at Oxford University Blavatnik School of Government, and former senior economist at the U.K. government’s Department for International Development. A version of this article appeared in the print edition of The Daily Star on April 05, 2018, on page 3.